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A COUPLE OF PRACTICAL
CONSIDERATIONS
Professional Indemnity Cover and
Independence:
For firms seeking to
remain independent, the regulator has
stressed the need for them to hold PI
insurance which covers them for the
‘full range of retail investment products’
they need to consider. (Or where any
product types were excluded under the
terms of their policies, to hold additional
capital as insurance).
This means finding PI insurance that will
cover the more esoteric investments
independent advisers might consider
for their clients, such as VCTs. Our
understanding is that to remain
independent advisers don’t need to pay
for PI cover or research on products that
are not relevant for their client bank or
target market, but that they do need
to be able to advise on these products
should the need arise. And advisers
must consider the risks in not including
these products - the regulator or client
might ask why they were excluded from
the opportunity.
VCTs on Adviser Platforms:
According to Transact, it is estimated
that platforms have over £350 billion
in assets under administration and
up to 80% of new retail investments
are now made via an investment
platform. Today almost all advisers use
at least one platform, and in surveys
both advisers and consumers cite the
functionality, ease of use and ability to
get a consolidated picture of their total
portfolio as key benefits.
Before the changes in the Finance
Bill in 2014, it was not possible to
purchase new shares in a VCT through
a platform or nominee – in other
words, investments had to be made
in the client’s own name in order for
them to claim the Income Tax relief. It
was possible to transfer existing VCT
investments, via a stock registration
process, to those adviser platforms that
could facilitate this type of transfer and
hold CREST shares.
It was recognised that this was a major
headache for advisers, and resolving
this issue would remove a significant
source of friction in the investment
process for advisers and investors, and
hopefully pave the way for increased
inflows.
The situation has begun to change.
Changes announced in the 2014 Finance
Bill allowed shares in VCTs to be bought
by a nominee and still qualify for the
tax reliefs. Nominee ownership is a
key requirement in enabling financial
advisers to manage their clients’
investments on platforms and in April
2015, Octopus announced that it had
completed a development with Transact
to enable shares in its VCTs to be
brought and held on the platform. Puma
Investments followed swiftly afterwards
and its VCT 12 is also available on
Transact.
This was a relatively big project for
Transact, Octopus and Puma but it may
be that now they have undertaken much
of the heavy lifting, it will be easier for
other platforms and VCT providers to
follow suit.
Intelligent Partnership held a roundtable
discussion between Transact, Octopus
and small group of VCT providers in
September 2015 to discuss the issue.
Transact were of course keen to get more
providers on board, as were Octopus:
they both want to see this become a new
route to market for VCTs, give investors
more choice as to how they want to buy
and hold their VCT investments, and to
create a genuine marketplace for VCTs
on advisory platforms.
The other VCT providers were also very
keen to get onto platforms, recognising
the benefits that being able to transact
in this way would bring. As Brendan
Llewellyn of Adviser Home (who gave
a short presentation on the topic) put
it, when it comes to winning over new
advisers “business process empathy is
crucial.” The providers see acceptance
on a platform as not only a way to make
life easier for existing IFAs, but also as
an opportunity to engage new IFAs. If
the market grew, the platforms would
presumably invest in developments
such as publishing NAVs as well as share
prices and reminding investors when
five year minimum holding periods are
coming to an end. It’s easy to see how
this could be a positive evolution for the
VCT industry.
There are some logistics to iron out as
well: providers and platforms need to
work closely together to manage their
pipelines to ensure that offers are not
oversubscribed (an issue for all closed
funds on platforms); the distribution
lists for ongoing communications to
investors will be impacted now that
the central share register cannot be
relied upon (as VCTs would be held in
the platform’s name); the process for
selling shares in the secondary market
has to be closely monitored to ensure
investors are getting the best possible
price; and Dividend Reinvestment
Schemes are harder to administer.
These are all logistical issues that will
be overcome as we see more take up on
VCTs on platforms.
Often the process will hinge upon the
interactions between the platform,
receiving agents and registrars, rather
than between the platform and the VCT
provider. With little commercial interest
in this development, there may be some
inertia on their part that also needs to
be overcome.
However, perhaps the biggest stumbling
block is the time and effort involved.
As market leaders, Octopus and
Puma can afford to put resources into
these projects (and kudos to them for
doing what a market-leader should
do and leading the way). Many other
VCT providers outsource the role of
receiving agent and registrar and/or
do not have the operational scale to
approach these projects in the same
way. Of course, some of the other VCTs
are also distracted by the recent rule
changes as well, or the independent
boards are not yet convinced by
the argument to purchase through
platform.
Nevertheless, we’re confident that as
more platforms and VCT providers work
together, any friction in the on-boarding
process will be minimised and it will
be easy enough for the small guys to
follow suit. We think there could be a
handful on Transact in 2015/16 and a lot
“Not being able to purchase new shares in a VCT through a platform or nominee was a major
headache for advisers, and resolving this issue would remove a significant source of friction in the
investment process for advisers and investors, and hopefully pave the way for increased inflows”